After the global economic crisis, the UK Government put new rules in place to protect the economy and taxpayers, which in part, calls on banks to separate retail banking from the rest of their business, so that in the unfortunate event of collapse of their more riskier investment banking operations, the day-to-day banking will be insulated from the crisis – thus protecting the customer. As banks execute on this ‘ring-fencing’ structural reform, they must pay attention to their spreadsheet dependent business processes.

Perhaps the biggest structural reform imposed on UK banks yet, the prudential regulation authority has enforced a 1 January 2019 deadline on banks with more than £25 billion deposits to separate their retail banking business from the riskier investment banking operations. A fallout of the 2007-08 financial crisis, this reform aims to protect the retail banking activities of banks from other unrelated risks that they might be subject to. The Treasury estimates that it will cost banks £3billion to set up and £4billion to run annually.

While the cost to banks is substantial of course, separation of businesses is no simple task. The Royal Bank of Scotland’s failed attempt to separate its Williams & Glyn division as a separate challenger bank due to technology problems is a case in point.

Role of spreadsheet management in structural reform

Come 2019, the retail arm of banks will need to operate as standalone, independent and self-sufficient units. They must have their own fully operational IT and data management systems, establish independent relationships with the financial market infrastructures, undertake appropriate risk management, and meet the numerous regulatory and compliance requirements that all banks are subject to. To achieve this, they need to extricate themselves from the different parts of their banking group.

The separation of enterprise systems between the retail and investment arms of banks is a major part of this structural transformation. Most banks have the understanding and the ability to effectively disentangle the core enterprise systems. Where in this extrication process, banks are likely to come unstuck is situations wherever there are common or interconnected Microsoft Excel spreadsheetbased processes that are deeply linked with the rest of the banking group.

For instance, as banks separate their Treasury operations from the investment banking trading desks, there will likely be certain processes that heavily rely on common Bloomberg and Reuters market feeds that are owned by or have deep linkages to the banking group’s systems. Similarly, all the processes that were being undertaken for capital modelling across the banking group will now need to be separated so that the ring-fenced retail division is able to perform the function autonomously, while meeting all the associated regulatory reporting requirements. Routinely, large parts of the capital modelling process are reliant on, or even built in spreadsheets with data feeds for the model and supplementary calculations also being spreadsheet-based. Likewise, retail divisions of banking groups will need to adhere to the Bank of England’s annual stress tests.

With most stress test exercises reliant on spreadsheet-based models, retail divisions will need to ensure that the relevant data feeds and processes are properly disconnected and migrated so that the accuracy of their estimations and outputs are not in any way compromised.

Challenge of extricating spreadsheet processes

To safely split the complex, inter-connected business-critical processes that reside in spreadsheets, banks need complete visibility and an in-depth understanding of the spreadsheet landscape across the banking group. This includes the enterprise systems used by the retail and investment banking divisions and corresponding data flows; the associated spreadsheets and their distinctive data flows – along with the numerous intricate interconnections across the combined landscape and indeed the wider organisation.

Given the number of spreadsheets involved and the complexity of the dataflows and connections, trying to understand this manually is an impossible task. Also, if undertaken manually, it is time consuming, costly in man-power and prone to error – not an ideal approach with the deadline for the structural reform looming.

Technology-led approach is proven

Technology is the answer and its use is already proven in M&A type situations for operational transformation, which to some extent resembles the ring-fencing scenario. The disentangling of the Scottish Widows Investment Partnership (SWIP) from Lloyds Banking Group to Aberdeen Asset Management in 2014 is a good example.

Following its acquisition, SWIP needed to separate its business from Lloyds so that the necessary and critical processes could be migrated to Aberdeen Asset Management. SWIP utilised technology to inventory the spreadsheet landscape, identify the business critical processes, and understand them to pinpoint those that needed to be transferred. At the same time, technology helped expose the data lineage for all the individual files, clearly revealing their provenance, data sources and relationships with other spreadsheets. SWIP was able to securely migrate the relevant business processes to Aberdeen Asset Management and where necessary, even decommission the redundant processes.

Equally, many foreign banks that want to do business in the US are adopting this kind of technology-led approach to setting up Intermediate Holding Companies (IHCs). Many of the challenges that foreign banks face in establishing a separate legal entity in the country, prove the solvency of the IHC, ensure that the holding company meets the Federal Reserve’s stress test audits and so on, are similar to the ring-fencing impediments that banking groups will need to overcome in the UK.

In addition to enabling banking groups to separate the retail and investment banking businesses, a technology-led approach will enable the divisions to adopt a routine, automated approach to spreadsheet management, which will greatly assist the ring-fenced division to demonstrate control for regulatory reporting and compliance. Today, many of the regulatory frameworks including Dodd-Frank Act Stress Testing, Sarbanes Oxley Act, BCBS239, SR11-7 and many more are demanding visibility of the data lineages between the various governance models, including spreadsheets, across organisations’ information supply chain.

Automation is pragmatic

Technology offers a fail-safe and automated mechanism for understanding and delinking the businesses. It mitigates the risks, minimises the disturbances that separating financial controls and processes can cause for the ring-fenced entity and gives the new organisation the best possible start from market, regulatory and financial standpoints. Otherwise, the impact of poorly separated processes could be enormous on the ringfenced entities and their future.

Originally published in Intercontinental Finance & Law magazine. 

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